The impact of COVID-19 on remittances
As the world economy grinds to a halt with country after country shutting down in all but the most essential activities, the focus has been on stimulus packages, equity, fixed-income markets, and moves targeting currency and commodity prices.
There was less focus on lower-income countries. Some 80 countries have approached the International Monetary Fund (IMF), which is ready to deploy its full quick-response toolbox consisting of debt relief for IMF loans, rapid-financing facilities and a trillion-dollar lending facility. Some of the G20’s $5 trillion coronavirus rescue package, which was announced at last week’s virtual summit, will doubtlessly be directed to the multilateral aid agencies.
The World Bank, regional development banks, bilateral aid programs and other aid institutions will do their part too. However, the various domestic rescue packages will have to be financed via debt and taxes. In the wake of the coronavirus disease (COVID-19) crisis, tax rises will be inevitable in most countries that are part of the intergovernmental Organization for Economic Cooperation and Development. This will put pressure on the overseas development budget in these countries as well as on their contribution to multilateral aid agencies.
The aid flows will not be the only concern of developing countries as they contend with the aftermath of COVID-19 ravaging their economies. Many countries, particularly the Philippines, Pakistan, India, but also many Asian, African and Latin American countries depend heavily on the inflow of remittances.
In 2017, overseas workers in the Gulf Cooperation Council (GCC) sent more than $25 billion worth of remittances to India and slightly above $30 billion to Pakistan, Egypt, the Philippines and Bangladesh.
Migrant workers are a big part of the GCC economies. Eighty percent of the UAE population are overseas nationals. In Saudi Arabia, they make up more than a third and around 80 percent of the workforce. Many of these overseas workers are involved in low-skilled labor, employed in construction, hospitality and as domestic helpers. For most of them, their host countries are the only chance they have at gainful employment, and they have sent billions of dollars to their home countries from Saudi Arabia, the UAE and the US.
According to the World Bank, remittances are estimated to have contributed more than $700 billion to the global economy. The number is likely to be much higher, taking into account the importance of the informal sector.
The world’s economies will recalibrate when they resume full activity. In the GCC, many of these migrant workers have already been laid off and will return to their home countries once air travel resumes. It will be some time before the services of some of these workers are needed again.
The construction sector in the UAE is a good example. As real estate prices have reached their lowest level in 10 years, demand for new property development will slow for some time to come. This means that many of these construction workers will return home, adding to the masses of unemployed in these low to medium-income countries. Worse yet, these countries will have to forego the vital contribution to their GDP that they gain from remittances. According to World Bank estimates, they accounted for 8 and 9 percent of the GDP in Pakistan and the Philippines in 2019. In Nepal, the figure was a whopping 30 percent.
The inevitable return of overseas workers will be a double blow for many developing economies. On one hand, they will lose direly needed hard currency and on the other, they will have millions added to the army of unemployed. This means that many families will now fall below the poverty line and face all that it implies, including not being able to afford education, health care, housing or even food.
Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources